Freddie Mac 2011 Annual Report Download - page 72

affect what changes may occur to our business structure during or following conservatorship, including whether we will
continue to exist. These adverse consequences could result from perceptions concerning our activities and role in
addressing the housing and economic downturn, concern about our compensation practices, concerns about deficiencies in
foreclosure documentation practices or our actual or alleged action or failure to act in any number of areas, including
corporate governance, regulatory compliance, financial reporting and disclosure, purchases of products perceived to be
predatory, safeguarding or using nonpublic personal information, or from actions taken by government regulators in
response to our actual or alleged conduct.
The servicing alignment initiative, MHA Program, and other efforts to reduce foreclosures, modify loan terms and
refinance mortgages, including HARP, may fail to mitigate our credit losses and may adversely affect our results of
operations or financial condition.
The servicing alignment initiative, MHA Program, and other loss mitigation activities are a key component of our
strategy for managing and resolving troubled assets and lowering credit losses. However, there can be no assurance that
any of our loss mitigation strategies will be successful and that credit losses will not continue to escalate. The costs we
incur related to loan modifications and other activities have been, and will likely continue to be, significant because we
bear the full cost of the monthly payment reductions related to modifications of loans we own or guarantee, and all
applicable servicer and borrower incentives. We are not reimbursed for these costs by Treasury. For information on our
loss mitigation activities, see “MD&A — RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk —Single-
Family Loan Workouts and the MHA Program.”
We could be required or elect to make changes to our implementation of our other loss mitigation activities that
could make these activities more costly to us, both in terms of credit expenses and the cost of implementing and operating
the activities. For example, we could be required to, or elect to, use principal reduction to achieve reduced payments for
borrowers. This could further increase our losses, as we could bear the full costs of such reductions.
A significant number of loans are in the trial period of HAMP or the trial period of our new non-HAMP standard
loan modification. For information on completion rates for HAMP and non-HAMP modifications, see “MD&A — RISK
MANAGEMENT — Credit Risk — Mortgage Credit Risk —Single-Family Loan Workouts and the MHA Program.” A
number of loans will fail to complete the applicable trial period or qualify for our other loss mitigation programs. For
these loans, the trial period will have effectively delayed the foreclosure process and could increase our losses, to the
extent the prices we ultimately receive for the foreclosed properties are less than the prices we could have received had
we foreclosed upon the properties earlier, due to continued home price declines. These delays in foreclosure could also
cause our REO operations expense to increase, perhaps substantially.
Mortgage modification initiatives, particularly any future focus on principal reductions (which at present we do not
offer to borrowers), have the potential to change borrower behavior and mortgage underwriting. Principal reductions may
create an incentive for borrowers that are current to become delinquent in order to receive a principal reduction. This,
coupled with the phenomenon of widespread underwater mortgages, could significantly affect borrower attitudes towards
homeownership, the commitment of borrowers to making their mortgage payments, the way the market values residential
mortgage assets, the way in which we conduct business and, ultimately, our financial results.
Depending on the type of loss mitigation activities we pursue, those activities could result in accelerating or slowing
prepayments on our PCs and REMICs and Other Structured Securities, either of which could affect the pricing of such
securities.
On October 24, 2011, FHFA, Freddie Mac, and Fannie Mae announced a series of FHFA-directed changes to HARP
in an effort to attract more eligible borrowers whose monthly payments are current and who can benefit from refinancing
their home mortgages. The Acting Director of FHFA stated that the goal of pursuing these changes is to create refinancing
opportunities for more borrowers whose mortgages are owned or guaranteed by Freddie Mac and Fannie Mae, while
reducing risk for Freddie Mac and Fannie Mae and bringing a measure of stability to housing markets. However, there can
be no assurance that the revisions to HARP will be successful in achieving these objectives or that any benefits from the
revised program will exceed our costs. We may face greater exposure to credit and other losses on these HARP loans
because we are not requiring lenders to provide us with certain representations and warranties on these HARP loans. In
addition, changes in expectations of mortgage prepayments could result in declines in the fair value of our investments in
certain agency securities and lower net interest yields over time on other mortgage-related investments. The ultimate
impact of the HARP revisions on our financial results will be driven by the level of borrower participation and the volume
of loans with high LTV ratios that we acquire under the program. Over time, relief refinance mortgages with LTV ratios
above 80% may not perform as well as relief refinance mortgages with LTV ratios of 80% and below because of the
continued high LTV ratios of these loans. There is an increase in borrower default risk as LTV ratios increase, particularly
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